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Does Obama's CEO Pay Cap Make Sense?

By Beth Belton, February 5, 2009

The Obama team made a lot of taxpayers happy when it capped the pay and perks of execs who have been lining up for government help. But will it do any good?

President Obama and his Democrat colleagues, no doubt, are well intentioned. And they're tapping into a deep vein of justified anger about the huge losses that millions of innocent investors endured seemingly at the hands of greedy Wall Street bankers, some of whom like to renovate their offices with $35,000 toilets, among other extravagances.

But will capping executive pay at $500,000 for banks that get "extraordinary assistance" from Uncle Sam help get the economy back on a sound footing? How much help is a "name and shame" provision designed to prevent financial institutions from holding expensive parties and conferences at exotic resorts that they fly to on corporate jets?

The plan could end up making the financial mess worse. Goldman Sachs is already making plans to give the money it took from the government back as quickly as possible so that it's not subject to these onerous provisions. To an aggressive firm like that which has rewarded its executives and traders for performance above all else, returning the money too soon just in order to be out from under such draconian restrictions could come at the expense of more reasonable and strategic decision-making. Is that Washington really wants right now? Other banks may decide they'd rather pass on taking the money than have to swallow these bitter pills, and in the end fail as a result. Will that help solve the nation's credit crisis?

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Wall Street executives may deserve all the condemnation Washington can rain down upon them, but America can do better. How about President Obama and Congress focusing more energy on really figuring out how we're going to fix the housing mess? Most congressmen still don't know what percentage of new mortgages written after 2000 were adjustable rate as opposed to fixed-rate. Does the White House know?

That'd be a rather important number to get hold of if you're proposing -- as many are -- that lenders be forced to modify troubled variable-rate mortgages into fixed-rate mortgages. This is something that affects a wide swath of the banking industry, not just the Wall Street titans blamed for the mess we're in.

Who wasn't greedy? That's a big part of why the problems went undetected for so long and got so out of control. Yes, bad CEOs should be punished. But we live in a capitalist society with free markets, which have long done a good job of getting rid of CEOs who don't perform to the satisfaction of shareholders or who engage in malfeasance. Sometimes it takes a while to root out these guys. But look at the alternative systems in place around the world. Where would you rather live?

Whacking Wall Street's wizards may boost poll ratings but will a public pillory ensure that fewer people who are in mortgages they never should have been put in don't end up on the street with nowhere to go and nowhere to work?

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